1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-0001 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________to______________ COMMISSION FILE NUMBER: 0-23760 AMERICAN EAGLE OUTFITTERS, INC. (Exact name of registrant as specified in its charter) DELAWARE NO. 13-2721761 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 THORN HILL DRIVE, WARRENDALE, PA 15086-7528 (Address of principal executive offices) (Zipcode) (724) 776-4857 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $.01 PAR VALUE, 46,614,462 OUTSTANDING AS OF AUGUST 19, 1999
2 AMERICAN EAGLE OUTFITTERS, INC. ------------------------------- TABLE OF CONTENTS ----------------- <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION PAGE NO. --------------------- -------- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets July 31, 1999 (unaudited) and January 30, 1999 3 Consolidated Statements of Operations (unaudited) Three and six months ended July 31, 1999 and August 1, 1998 4 Consolidated Statements of Cash Flows (unaudited) Six months ended July 31, 1999 and August 1, 1998 5 Notes to Consolidated Financial Statements 6-8 Review By Independent Accountants 9 Independent Accountants' Review Report 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 Exhibit 15 Acknowledgment of Independent Accountants 16 Exhibit 27 Financial Data Schedule 17 </TABLE>
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (Dollars in thousands) July 31, January 30, ASSETS 1999 1999 ---- ---- Current assets: (Unaudited) <S> <C> <C> Cash and cash equivalents $ 49,099 $ 71,940 Short-term investments 21,797 13,360 Merchandise inventory 74,363 49,688 Accounts and note receivable, including related party 13,276 8,560 Prepaid expenses and other 9,075 2,757 Deferred income taxes 19,525 8,199 -------- -------- Total current assets 187,135 154,504 -------- -------- Fixed assets: Fixtures and equipment 42,602 36,307 Leasehold improvements 60,215 46,996 -------- -------- 102,817 83,303 Less: Accumulated depreciation and amortization 34,576 29,933 -------- -------- 68,241 53,370 -------- -------- Other assets 8,306 3,074 -------- -------- Total assets $263,682 $210,948 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 29,801 $ 18,551 Accrued compensation and payroll taxes 15,587 17,739 Accrued rent 14,745 13,042 Accrued income and other taxes 2,211 3,208 Other liabilities and accrued expenses 7,938 7,211 -------- -------- Total current liabilities 70,282 59,751 -------- -------- Stockholders' equity: Preferred stock -- -- Common stock 466 461 Contributed capital 80,103 64,561 Retained earnings 119,066 89,874 -------- -------- 199,635 154,896 Less: Deferred compensation 1,930 2,419 Accumulated other comprehensive loss 4,305 -- Treasury stock -- 1,280 -------- -------- Total stockholders' equity 193,400 151,197 -------- -------- Total liabilities and stockholders' equity $263,682 $210,948 ======== ======== </TABLE> 3
4 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $178,582 $125,731 $323,986 $225,425 Cost of sales, including certain buying, occupancy and warehousing expenses 105,993 76,668 192,370 139,145 -------- -------- -------- -------- Gross profit 72,589 49,063 131,616 86,280 Selling, general and administrative expenses 42,693 31,782 79,801 58,005 Depreciation and amortization 2,753 2,084 5,237 4,059 -------- -------- -------- -------- Operating income 27,143 15,197 46,578 24,216 Interest income, net 785 541 1,519 1,083 -------- -------- -------- -------- Income before income taxes 27,928 15,738 48,097 25,299 Provision for income taxes 10,979 6,185 18,905 9,941 -------- -------- -------- -------- Net income $ 16,949 $ 9,553 $ 29,192 $ 15,358 ======== ======== ======== ======== Basic income per common share $ 0.36 $ 0.21 $ 0.63 $ 0.34 ======== ======== ======== ======== Diluted income per common share $ 0.35 $ 0.20 $ 0.60 $ 0.32 ======== ======== ======== ======== Weighted average common shares outstanding - basic 46,458 45,242 46,218 45,038 ======== ======== ======== ======== Weighted average common shares outstanding - diluted 48,682 48,112 48,559 47,764 ======== ======== ======== ======== Retained earnings, beginning $102,117 $ 41,561 $ 89,874 $ 35,756 Net income 16,949 9,553 29,192 15,358 -------- -------- -------- -------- Retained earnings, ending $119,066 $ 51,114 $119,066 $ 51,114 ======== ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements 4
5 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Six Months Ended -------------------- July 31, August 1, 1999 1998 ---- ---- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 29,192 $ 15,358 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR ) OPERATING ACTIVITIES: Depreciation and amortization 5,237 4,059 Loss on impairment and write-off of fixed assets 583 1,118 Restricted stock compensation 490 618 Deferred income taxes 60 (2,361) CHANGES IN ASSETS AND LIABILITIES: Merchandise inventory (24,675) (18,044) Accounts and note receivable (4,716) 2,238 Prepaid expenses and other (8,327) (1,364) Accounts payable 11,253 (264) Accrued liabilities 2,078 (2,634) -------- -------- Total adjustments (18,017) (16,634) -------- -------- Net cash provided by (used for) operating activities 11,175 (1,276) -------- -------- INVESTING ACTIVITIES: Capital expenditures (20,710) (12,215) Net purchase of short-term investments (15,529) -- -------- -------- Net cash used for investing activities (36,239) (12,215) -------- -------- FINANCING ACTIVITIES: Net proceeds from stock options exercised 2,223 1,398 -------- -------- Net cash provided by financing activities 2,223 1,398 -------- -------- Net decrease in cash and cash equivalents (22,841) (12,093) Cash and cash equivalents - beginning of period 71,940 48,359 -------- -------- Cash and cash equivalents - end of period $ 49,099 $ 36,266 ======== ======== </TABLE> See Notes to Consolidated Financial Statements 5
6 AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. INTERIM FINANCIAL STATEMENTS The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the "Company") at July 31, 1999 and for the three and six month periods ended July 31, 1999 (the "current period") and August 1, 1998 (the "prior period") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Consolidated Balance Sheet at January 30, 1999 was derived from the audited financial statements. The Company's business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the current and prior periods are not necessarily indicative of future financial results. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company's Fiscal 1998 Annual Report. 2. BASIS OF PRESENTATION ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. CASH AND CASH EQUIVALENTS Cash includes cash equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. SHORT-TERM INVESTMENTS AND OTHER COMPREHENSIVE LOSS Cash in excess of operating requirements is invested in marketable equity or government debt obligations. As of July 31, 1999, short-term investments include investments with an original maturity of greater than three months (averaging approximately 11 months) and consist primarily of tax-exempt municipal bonds classified as available for sale and marketable equity securities. The primary difference between net income and comprehensive income is related to the change in the market value, net of tax, of the above described investments as follows: <TABLE> <CAPTION> (In thousands) Three Months Ended Six Months Ended ------------------ ---------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 16,949 $ 9,553 $ 29,192 $ 15,358 Other comprehensive loss, net of tax ($ 4,305) $ -- ($ 4,305) $ -- -------- -------- -------- -------- Total comprehensive income $ 12,644 $ 9,553 $ 24,887 $ 15,358 ======== ======== ======== ======== </TABLE> 6
7 CAPITAL STRUCTURE The Company has 125,000,000 common shares authorized at $.01 par value, and 46,577,303 shares issued and outstanding as of July 31, 1999 and 46,110,984 shares outstanding as of January 30, 1999. There are 5,000,000 preferred shares authorized at $.01 par value with none outstanding. During the period ending July 31, 1999, the Company retired approximately $1,280,000 and 475,000 shares of treasury stock. EARNINGS PER SHARE The following table shows the amounts used in computing earnings per share and the effect on income per share and the weighted average number of shares of dilutive potential common stock (stock options and restricted stock). <TABLE> <CAPTION> (In thousands) Three Months Ended Six Months Ended ------------------ ---------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $16,949 $ 9,553 $29,192 $15,358 ======= ======= ======= ======= Weighted average number of common shares used in basic EPS 46,458 45,242 46,218 45,038 Effect of dilutive stock options and non-vested restricted stock 2,224 2,870 2,341 2,726 ------- ------- ------- ------- Weighted average number of common shares and dilutive potential common stock used in diluted EPS 48,682 48,112 48,559 47,764 ======= ======= ======= ======= </TABLE> RECLASSIFICATION Certain reclassifications have been made to the Consolidated Financial Statements for the prior period in order to conform to the July 31, 1999 presentation. 3. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Because there were no borrowings under the terms of the Company's line of credit, there were no amounts paid for interest during the three or six months ended July 31, 1999 or August 1, 1998. Income tax payments were $17.4 million and $18.7 million during the six months ended July 31, 1999 and August 1, 1998, respectively. During the six months ended July 31, 1999 and August 1, 1998, $14.6 million and $1.6 million, respectively, were recognized as increases to contributed capital, related to the tax benefits associated with the exercise and vesting of stock options and restricted stock. 4. RELATED PARTY TRANSACTIONS The Company has various transactions with related parties. The nature of the relationship is primarily through common ownership. The Company has an operating lease for its corporate headquarters and distribution center with an affiliate. The lease, which was entered into on January 1, 1996, and expires on December 31, 2010, provides for annual rental payments of approximately $1.2 million through 2001, $1.6 million through 2006, and $1.8 million through the end of the lease. In addition, the Company and its subsidiaries purchase merchandise from and sell merchandise to various related parties and use the services of a related importing company. Related party amounts follow: 7
8 <TABLE> <CAPTION> (In thousands) Three Months Ended Six Months Ended ------------------ ---------------- July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Merchandise purchases through a related party importer $14,914 $20,277 26,265 $35,326 Accounts payable $ 3,398 $ 9,616 3,398 $ 9,616 Accounts and notes receivable $ 4,501 $ 1,119 4,501 $ 1,119 Rent expense $ 387 $ 387 774 $ 774 Merchandise sales $ 1,715 $ -- 4,133 $ 2,534 </TABLE> The Company provides short-term loans to certain officers to pay the taxes on the restricted stock that vests each year. As of July 31, 1999 and August 1, 1998, the outstanding value of these loans approximated $2,207,000 and $843,000, respectively. 5. ACCOUNTS RECEIVABLE Accounts receivable is comprised of the following: <TABLE> <CAPTION> (In thousands) July 31, January 30, 1999 1999 ---- ---- <S> <C> <C> Accounts receivable - construction allowances $ 3,415 $ 4,008 Related party accounts and note receivable 4,501 2,829 Accounts receivable - other 5,360 1,723 ------- ------- Total $13,276 $ 8,560 ======= ======= </TABLE> 6. INCOME TAXES For the three and six months ended July 31, 1999 and August 1, 1998, the effective tax rate used for the provision of income tax approximated 39%. 7. LEGAL PROCEEDINGS The Company is a party to ordinary routine litigation incidental to its business. Management does not expect the results of the litigation to be material to the financial statements individually or in the aggregate. 8
9 REVIEW BY INDEPENDENT ACCOUNTANTS Ernst & Young LLP, our independent accountants, have performed a limited review of the Consolidated Financial Statements for the three and six month periods ended July 31, 1999 and August 1, 1998, as indicated in their report on the limited review included below. Since they did not perform an audit, they express no opinion on the Consolidated Financial Statements referred to above. Management has given effect to any significant adjustments and disclosures proposed in the course of the limited review. INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders American Eagle Outfitters, Inc. We have reviewed the accompanying consolidated balance sheet of American Eagle Outfitters, Inc. as of July 31, 1999, and the related consolidated statements of operations for the three and six month periods ended July 31, 1999 and August 1, 1998 and the consolidated statements of cash flows for the six month periods ended July 31, 1999 and August 1, 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of American Eagle Outfitters, Inc. as of January 30, 1999, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein) and in our report dated February 26, 1999 (except for Note 12, as to which the date is April 7, 1999) we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of January 30, 1999, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Pittsburgh, Pennsylvania August 18, 1999 9
10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS This table shows the percentage relationship to net sales of the listed items included in the Company's Consolidated Statements of Operations. <TABLE> <CAPTION> July 31, August 1, July 31, August 1, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales, including certain buying, occupancy 59.4 61.0 59.4 61.7 ----- ----- ----- ----- and warehousing expenses Gross profit 40.6 39.0 40.6 38.3 23.9 25.2 24.6 25.8 Selling, general and administrative expenses 1.5 1.7 1.6 1.8 ----- ----- ----- ----- Depreciation and amortization 15.2 12.1 14.4 10.7 Operating income 0.4 0.4 0.4 0.5 ----- ----- ----- ----- Interest income, net 15.6 12.5 14.8 11.2 Income before income taxes 6.1 4.9 5.8 4.4 ----- ----- ----- ----- Provision for income taxes 9.5% 7.6% 9.0% 6.8% ===== ===== ===== ===== Net income </TABLE> COMPARISON OF THREE MONTHS ENDED JULY 31, 1999 TO THE THREE MONTHS ENDED AUGUST 1, 1998 Net sales increased 42.0% to $178.6 million from $125.7 million. The increase includes: - -$24.5 million from comparable store sales, representing a 19.8% increase over the prior year, and -$28.4 million from new and non-comparable store sales, and non-store sales. The increase resulted from an increase of 49.6% in units sold, offset by a 5.8% decrease in prices. We operated 426 stores at the end of the current period, compared to 347 stores at the end of the prior period. Gross profit increased to $72.6 million from $49.1 million. Gross profit as a percent of net sales increased to 40.6% from 39.0% . The increase in gross profit as a percent of net sales, was attributable to a 1.2% increase in merchandise margins as well as a 0.4% improvement in buying, occupancy, and warehousing costs. The increase in merchandise margins resulted primarily from improved mark-ons, offset by increased markdowns as a percent of sales. This improvement in buying, occupancy, and warehousing costs reflect improved leveraging achieved through comparable store sales growth. 10
11 Selling, general and administrative expenses increased to $42.7 million from $31.8 million. As a percent of net sales, these expenses decreased to 23.9% from 25.2%. The $10.9 million increase includes: - -$5.9 million in store operating expenses to support new store growth, - -$0.7 million for increased promotional advertising, direct mail, and non-store advertising costs, - -$1.9 million in compensation costs to support increased sales, and - -$2.4 million for general services purchased, supplies, and other expenses. Depreciation and amortization expense increased to $2.8 million from $2.1 million. As a percent of net sales, these expenses decreased to 1.5% from 1.7%. Interest income increased to $0.8 million from $0.5 million because of higher cash reserves available for investment. No borrowings were required under the terms of our line of credit during the current or prior periods. Income before income taxes increased to $27.9 million from $15.7 million. As a percent of net sales, income before income taxes increased to 15.6% from 12.5% . The increase in income before income taxes as a percent of sales was attributable to the factors noted above. COMPARISON OF SIX MONTHS ENDED JULY 31, 1999 TO THE SIX MONTHS ENDED AUGUST 1, 1998 Net sales increased 43.7% to $324.0 million from $225.4 million. The increase includes: - -$51.7 million from comparable store sales, representing a 23.2% increase over the prior year, and - -$46.9 million from new and non-comparable store sales, and non-store sales. The increase resulted from an increase of 49.8% in units sold, offset by a 5.0% decrease in prices. We operated 426 stores at the end of the current period, compared to 347 stores at the end of the prior period. Gross profit increased to $131.6 million from $86.3 million. Gross profit as a percent of net sales increased to 40.6% from 38.3% . The increase in gross profit as a percent of net sales, was attributable to a 0.9% increase in merchandise margins as well as a 1.4% improvement in buying, occupancy, and warehousing costs. The increase in merchandise margins resulted primarily from improved mark-ons, offset by increased markdowns as a percent of sales. This improvement in buying, occupancy, and warehousing costs reflect improved leveraging achieved through comparable store sales growth. Selling, general and administrative expenses increased to $79.8 million from $58.0 million. As a percent of net sales, these expenses decreased to 24.6% from 25.8%. The $21.8 million increase includes: - -$10.0 million in store operating expenses to support new store growth, - -$2.7 million for increased promotional advertising, direct mail, and non-store advertising costs, - -$4.1 million in compensation costs to support increased sales, and - -$5.0 million for general services purchased, supplies, and other expenses. Depreciation and amortization expense increased to $5.2 million from $4.1 million. As a percent of net sales, these expenses decreased to 1.6% from 1.8%. Interest income increased to $1.5 million from $1.1 million because of higher cash reserves available for investment. No borrowings were required under the terms of our line of credit during the current or prior periods. Income before income taxes increased to $48.1 million from $25.3 million. As a percent of net sales, income before income taxes increased to 14.8% from 11.2% . The increase in income before income taxes as a percent of sales was attributable to the factors noted above. LIQUIDITY AND CAPITAL RESOURCES Our primary source of cash in the current period was from net income. Our primary uses of cash included $24.7 million to support inventory 11
12 increases for anticipated sales and new store growth, $20.7 million in capital expenditures and $15.5 million to purchase short-term investments. Working capital at July 31, 1999 was $116.9 million compared to $59.5 million at August 1, 1998. The increase in working capital resulted primarily from the increase in cash provided by operating activities. Capital expenditures, net of construction allowances, totaled $20.7 million for the six months ended July 31, 1999. These expenditures included: - -new stores totaling $10.3 million including future new store openings, - -remodeling of store locations totaling $5.2 million including future remodels, - -improvements to our distribution center of $3.2 million, and - -other capital expenditures of $2.0 million. At July 31, 1999, the Company had an unsecured demand lending arrangement with a bank to provide a $100 million line of credit (reflecting a $25 million increase in line availability which occurred in June 1999) at either the lender's prime lending rate (8.0% at July 31, 1999) or a negotiated rate such as LIBOR. The facility has a limit of $40.0 million that can be used for direct borrowing. No borrowings were required against the line for the current or prior period. At July 31, 1999, letters of credit in the amount of $53.9 million were outstanding leaving a remaining available balance on the line of $46.1 million. We are currently planning to open approximately 40 stores during the remainder of the fiscal year. This forward-looking statement will be influenced by factors including our financial position, consumer spending, and the number of acceptable mall store leases that may become available. We believe that cash flow from operations and our bank line of credit will be sufficient to meet our anticipated cash requirements through Fiscal 1999. IMPACT OF INFLATION We do not believe that the relatively modest levels of inflation occurring in the United States in recent years have significantly effected our net sales or our profitability. Substantial increases in cost, however, could have a significant impact on us and the industry in the future. IMPACT OF YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of our computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. State of Readiness: As of June 30, 1999, the Company is Year 2000 ready. Our plan to resolve the internal Year 2000 issue involved two major phases: detection and correction. The detection phase included planning, inventory, triage, and detailed assessment. We took an inventory of all our information technology and non-information technology systems to determine which of our systems were not Year 2000 compliant. We also implemented procedures to review the Year 2000 readiness in all recently acquired equipment. Next, the Company prioritized actions related to the Year 2000 problems based upon their potential impact on the Company. This detailed assessment of the problems and a correction plan were completed in October 1998. The correction phase included repair and resolution and testing and implementation. We had four mission critical systems: distribution center systems, point of sale systems, merchandising software, and financial software. All systems are now Year 2000 ready. With respect to suppliers and business partners, we have sent letters to approximately 1,800 parties in an attempt to determine the possible impact of failure of third parties to be Year 2000 compliant. Approximately 75% of the parties contacted have returned our questionnaire. We have had discussions with our major suppliers and continue to follow up with third parties to ensure that they remain on schedule with their Year 2000 compliance. We are in the process of visiting our major suppliers to review their Year 2000 readiness. We have determined that approximately 10% of our vendors will not be Year 2000 compliant. However, none of these third parties are critical to our continuing operations. We believe that all of our major suppliers and business partners will be Year 2000 compliant. Costs to Address Our Year 2000 Issues: The total cost of the Year 2000 project was $1.9 million of which $0.5 million relates to hardware and software which was capitalized. The remaining costs were expensed as incurred and include salaries, incentive compensation and third party consulting services. These costs were funded through cash flows from operations. Risks of Our Year 2000 Issues: We are dependent on our suppliers and business partners. If efforts on our part, our customers' part, our suppliers' and business partners' part, or the part of public utilities or the government fail to adequately address the relevant Year 12
13 2000 issues, the most likely worst case scenario would be possible delays in the delivery of merchandise to our stores. We do not currently believe that any such delay will have a materially adverse effect on us. Our Contingency Plans: While we anticipate that all of our major suppliers and business partners will be Year 2000 compliant, we have developed comprehensive contingency plans which will allow the continuation of business operations in the event that we or any of our significant suppliers or business partners do not properly address Year 2000 issues. Testing of these contingency plans will continue through the end of the year. We will obtain early delivery of some merchandise from suppliers in an attempt to mitigate any Year 2000 issues that may arise. We are also looking for alternative vendors to supply products and services in the event that some of our current non-mission critical vendors are unable to perform because of Year 2000 problems. Further, we are searching for ways that we can support our current vendors who may have Year 2000 problems. We cannot assure you that our efforts will prevent all consequences and there may be undetermined future costs due to business disruption that may be caused by suppliers, transportation disruptions, or unforeseen circumstances. SAFE HARBOR STATEMENT, SEASONALITY, AND BUSINESS RISKS This report contains various `forward-looking statements' within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events, including the following: - -the planned opening of approximately 40 stores during the remainder of Fiscal 1999, - -the sufficiency of cash flows and line of credit facilities to meet Fiscal 1999 requirements, and - -the completion of modifications to computer systems to enable the processing of transactions in the year 2000 and beyond. We caution that these statements are further qualified by factors that could cause actual results to differ materially from those in the forward-looking statements, including without limitation, the following: - -decline in demand for our merchandise, - -the ability to obtain suitable sites for new stores at acceptable costs, - -the hiring and training of qualified personnel, - -the integration of new stores into existing operations, - -the expansion of buying and inventory capabilities, - -the availability of capital, - -our ability to anticipate and respond to changing consumer preferences and fashion trends in a timely manner, - -any disaster or casualty resulting in the interruption of service for our distribution center, - -the effect of economic conditions, and - -the effect of competitive pressures from other retailers. Results actually achieved may differ materially from expected results in these statements. Historically, our operations have been seasonal, with a disproportionate amount of net sales and a majority of net income occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season and, to a lesser extent, the third quarter, reflecting increased demand during the back-to-school selling season. During Fiscal 1998, these periods accounted for approximately 62% of our sales. As a result of this seasonality, any factors negatively affecting us during the third and fourth fiscal quarters of any year, including adverse weather or unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions. 13
14 PART II - OTHER INFORMATION Item 1. Legal Proceedings In a complaint filed on June 2, 1998 in the action styled, Abercrombie & Fitch Stores, Inc. v. American Eagle Outfitters, Inc., Civil Action No. C2-98-569, in the United States District Court, Southern District of Ohio, Eastern Division, Abercrombie & Fitch alleged that we infringed their trade dress. Our motion for summary judgement was granted by the Court on July 14, 1999 dismissing the lawsuit with prejudice. Abercrombie & Fitch has filed a motion with the Court to reconsider its position. Item 4. Submission of Matters to a Vote of Security Holders (a) The Company held its 1999 Annual Meeting of Shareholders on June 8, 1999. Holders of 21,089,624 common shares of the Company were present representing approximately 91% of the Company's 23,173,466 common shares issued and outstanding. (b) and (c) The following persons were elected as members of the Company's Board of Directors to serve until the annual meeting following their election or until their successors are duly elected and qualified. Each person received the number of votes for or the number of votes with authority withheld indicated below. <TABLE> <CAPTION> Name Votes For Votes Withheld - ---- --------- -------------- <S> <C> <C> Ari Deshe 21,037,753 51,871 Michael G. Jesselson 21,045,804 43,820 George Kolber 21,076,087 13,537 Roger S. Markfield 21,045,799 43,825 Jay L. Schottenstein 20,995,814 93,810 </TABLE> The proposal to approve the Company's 1999 Stock Incentive Plan described in the Proxy Statement passed with 14,210,005 votes For; 4,826,966 votes Against; and 30,408 votes Abstain. (d) Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 15 Acknowledgement of Ernst & Young LLP Exhibit 27 Financial Data Schedule (b) None. 14
15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. <TABLE> <S> <C> Dated September 2, 1999 American Eagle Outfitters, Inc. (Registrant) /s/ Laura A. Weil ---------------------------------------------------- Laura A. Weil Executive Vice President and Chief Financial Officer /s/ Dale E. Clifton ---------------------------------------------------- Dale E. Clifton Vice President, Controller and Chief Accounting Officer </TABLE> 15